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Constructive help for Osborne ahead of 'formidably hard' cuts

More positive economic news for the Chancellor - but the IFS insists he shouldn't be tempted to ease off...

by James Taylor

Published: 02 Feb 2011

Last Updated: 19 Aug 2013

It's been a pretty good week so far for Chancellor George Osborne; after yesterday's news of the biggest jump in UK manufacturing activity since records began, new figures out this morning suggest that the construction sector also enjoyed a welcome return to growth in January. What's more, the well-regarded Institute for Fiscal Studies said today that the Government probably won't need to borrow as much money this year as expected. The IFS also warned - in news of the ursine sylvan defecation variety - that the Government's package of cuts will be 'formidably hard to deliver', insisting that Osborne shouldn't get over-excited and give the electorate a hand-out in the March budget. Another excuse to keep the pedal to the metal...

The construction industry figures come from the monthly index collated by Markit and the Chartered Institute of Purchasing and Supply (the same lot that produced yesterday's stonking manufacturing figures - now Osborne's favourite stattos?). After dropping to 49.1 in December – and anything under 50 represents a contraction – the index bounced back to 53.7 in January. So it looks like the industry has been making up for some of the time lost to snow before Christmas, with the civil engineering side faring particularly well. OK, so some analysts reckon that growth is pretty minimal, if you take out the snow-related distortion. But it does lend more credence to the idea that the UK economy is bouncing back this quarter after its dismal showing in Q4 last year.

Osborne will also see the latest musings of the IFS as further validation of his approach. The independent think-tank reckons the Government will have to borrow about £3bn less than predicted in the current financial year. And despite its warnings about how hugely ambitious the Government's proposed cuts are, it doesn't think Osborne should be tempted to loosen fiscal policy in the Budget: it thinks this will just result in the Bank of England hiking interest rates, so we wouldn't see any benefit anyway. The Chancellor will love that, since it effectively endorses the Coalition's economic policy over Labour's.

Sadly for the Treasury, the IFS report wasn't all good news. The think-tank also worries that growth will be weaker than the Government expects over the next five years, particularly since public spending is being slashed faster than anywhere apart from Ireland and Iceland. As Pfizer's decision to close its UK R&D facility reminded us, the Coalition's attempts to rebalance the economy will be a lot easier said than done. And with a new ComRes/ ITV News poll revealing that 52% of people think the UK is heading for a double-dip, and 48% that the Government has lost control of the economy, Osborne still has a lot of persuading to do.